Beyond the frontier: what are the frontier markets and why do they matter?


Thursday 24 June was an important day for the many pension funds, insurance companies and other institutions that invest in foreign stock markets.

It was the day that MSCI announced its annual Market Classification Review.

MSCI is a company that compiles and calculates indices which define stock markets around the world.

These indices are widely used by investors as benchmarks to measure investment performance.

If you want to invest in any of these indices, you can do so through an exchange-traded fund (ETF) or a tracker fund which follows them closely.

The Market Classification Review provides a snapshot of how particular countries are regarded by the mainstream investment community – as destinations for stock market investment.

MSCI publishes a lot of indices that include listed companies from several national stock markets.

Sometimes, these indices are defined by where the national stock markets are: examples include the MSCI Europe Index or the MSCI Pacific Index.

Measuring 85% of the stock markets that foreign investors can reach in those regions

On other occasions, the indices are defined by what sort of stock markets are included.

The MSCI World Index, for instance, was launched at the end of March 1986: it currently includes 1,562 listed companies from 23 developed markets – with the stocks accounting for about 85% of the value of the total that is available to the investing public.

Developed markets include the United States, Canada, the UK, the richer continental European countries, Australia, Japan, Hong Kong, Singapore and New Zealand.

The MSCI Emerging Markets Index also seeks to include about 85% of the listed shares that are available to the public – from 27 countries.

This index was launched at the beginning of 2001 and currently includes 1,424 companies.

MSCI sometimes publishes data for performance of the emerging markets prior to that date: in that instance, “MSCI uses calculations of how the index might have performed over that time period had the index existed”.

Over time, the emerging markets have grown in importance.

When the MSCI Emerging Markets Index was introduced, it included companies from just ten countries: together, the stock market value of the companies amounted to less than 1% of the MSCI All Country World Index (ACWI – another measure of the global stock market).

Today, the MSCI Emerging Markets Index companies account for about 12% of the value of the ACWI. Currently the emerging markets include countries like: Brazil, Chile, Colombia and Mexico in Latin America; China, India, Malaysia, Taiwan, Indonesia and Thailand in Asia; and Turkey, Russia, South Africa, the Czech Republic and Egypt in the rest of the world.

So, what makes a national stock market a developed market or an emerging market… or a frontier market?

In classifying a particular country, MSCI looks at the overall economic development of the country in question and how open its stock market (s) is/are to inbound investment by foreigners.

In terms of their economic development, the emerging markets are a lot more varied than the developed countries.

Particular companies are included if they are large enough and sufficiently widely traded to meet MSCI’s standards.

The market accessibility criteria taken into account by MSCI “aim to reflect international institutional investors’ experiences of investing in a given market and include five criteria: openness to foreign ownership, ease of capital inflows/outflows, efficiency of operational framework, availability of investment instruments and stability of the institutional framework.”

As a general rule, then, the developed markets countries are richer than, and have more sophisticated stock markets than emerging markets.

There are also countries whose lack of market accessibility mean that they are not eligible for inclusion as emerging markets.

These are the frontier markets.

MSCI’s Frontier Markets Index was launched in mid-December 2007. Currently it includes 81 stocks from 27 countries.

Those countries are an eclectic bunch, and include Bahrain, Bangladesh, Burkina Faso, Benin, Croatia, Estonia, Guinea-Bissau, Iceland, Ivory Coast, Jordan, Kenya, Lithuania, Kazakhstan, Mauritius, Mali, Morocco, Niger, Nigeria, Oman, Romania, Serbia, Senegal, Slovenia, Sri Lanka, Togo, Tunisia and Vietnam.

These are also countries which, for whatever reason, are not sufficiently accessible to be included as frontier markets.

MSCI compiles Standalone Indices for these countries: examples include Jamaica, Trinidad & Tobago, Panama, Botswana, Zimbabwe, Lebanon, Palestine, Bosnia–Herzegovina, Malta and Ukraine.

There is one more standalone country: that is Bulgaria, where I am at the moment.

Promotion and demotion

In researching for this edition of Capital & Conflict, I found that Bulgaria had been reclassified by MSCI from being a Frontier Market to being a Standalone country in August 2016.

The most recent demotion, announced last Thursday (24 June), is that of Argentina: later this year, it will be treated as a Standalone country rather than as an Emerging Market.

MSCI is also considering moving Pakistan from being an Emerging Market to being a Frontier Market.

MSCI “continues to monitor the market accessibility of the Nigerian equity market.”

In short, the world of international stock market investment is a dynamic one, with a lot of changes.

Other movements announced by MSCI in the last decade include:

  • Iceland – from Standalone to Frontier Market (May 2021)
  • Lebanon – from Frontier Market to Standalone (February 2021)
  • Kuwait – from Frontier Market to Emerging Market (November 2020)
  • Saudi Arabia – from Standalone to Emerging Market (May 2019)
  • Argentina – from Standalone to Emerging Market (May 2019)
  • China – A Shares included in MSCI Emerging Market Index (May 2018)
  • Pakistan – from Frontier Market to Emerging Market (May 2017)
  • West African Economic & Monetary Union (WAEMU) from Standalone to Frontier Market (November 2016)
  • Ukraine – from Frontier Market to Standalone (August 2016)
  • Qatar – from Frontier Market to Emerging Market (May 2014)
  • United Arab Emirates (UAE) – from Frontier Market to Emerging Market (May 2014)
  • Greece – from Developed Market to Emerging Market (November 2013)
  • Morocco – from Emerging Market to Frontier Market (November 2013)
  • Trinidad & Tobago – from Frontier Market to Standalone (May 2011).

What it all means

Writing from a delightful restaurant in Varna, on Bulgaria’s Black Sea coast, I must first stress that MSCI’s assessments only apply to a country’s stock market.

A downwards revision of a country’s classification is emphatically not an adverse judgement of its people, prospects or attractions as a place to visit (or in which to live).

And vice versa, of course.

As a general rule, the frontier markets and the emerging markets are likely to grow and change more than developed markets.

Sometimes the change comes because the economies are expanding more rapidly.

On other occasions, the opportunity comes because large numbers of consumers can afford to save (or spend) more.

Alternatively, the prospects for investors may come from deregulation of the economy or liberalisation of the financial system.

Perhaps most excitingly, the national markets generally do not move together.

You can reduce risk by investing across several of them at once.

This is something that becomes clearer when you look at what are the largest companies in the MSCI Frontier Markets and Emerging Markets Indices.

You will see that these companies are sometimes linked to the big trends of growth and change that we look at in other publications of Southbank Investment Research – such as Exponential Investor.

But, what are those leading companies?

That is a question which I will address in tomorrow’s edition of Capital & Conflict.

Andrew Hutchings
Managing Editor, Southbank Investment Research

Category: Economics

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